ECB hikes interest rates by 25 bps to 3.25%

In a “widely expected” action, European Central Bank (ECB) proceeded with a fresh 25 basis point interest rate hike on Thursday afternoon, marking a slowdown from a recent string of more aggressive 50-point hikes.

As a result of the 25-bps rate hike, ECB's deposit facility rate will climb to 3.25% from 3%, while the primary refinancing operations will rise to 3.75%, and the marginal lending facility rate will move up to 4.00%. The ECB also said it will continue to reduce its balance sheet by its current rate of €15 billion (€1 = $1.1023) per month until the end of June.

Speaking to reporters, ECB president Christine Lagarde suggested that this may not be the final rise in its current policy tightening campaign, as the persistent EU headline inflation which stood at 7% in April, give more ground to ECB to raise rates and not pause.

ECB gives priority to curbing stubborn inflation, primarily the Core inflation index which excludes volatile items like energy and food, and stood at 5.6% in April, remaining well above the ECB's stated 2% medium-term target.

Euro reaction:

Euro, which was trading to near yearly highs of $1.11 a dollar just before the ECB’s rate announcement, fell and stabilized just above the key $1.10 support level after the policy decision, as investors didn’t really buy ECB President Christine Lagarde's signals for further rate hikes to come in the following months, on growing fears over economic uncertainty and banking turmoil.

EUR/USD pair, Weekly chart

A deepening crisis across U.S. regional banks, the release of weaker-than-expected economic data, and the current ECB-FED monetary policy divergence have kept investors away from the greenback in favor of the euro, allowing EUR/USD pair to bounce off decades low of $0.95 hit on the end-September 2022, to the current highs of $1.10- $1.11 range.